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US Rate Path in Question

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It has been a fairly wild week in markets, with volatility expanding from FX to Equities and Fixed Income. The much-tracked SP500 index dropped sharply and US long term treasuries spiked higher on what appeared to be capitulating short positions. This unwinding of positions also took place across most USD currency pairs, causing some very dramatic moves on Wednesday.

US Retail Sales and PPI data showed weakness in the US economy, with Core and Non-Core Retail Sales coming in at -0.2% and -0.3% against expectations of 0.2% and -0.1% respectively. The PPI figure also fell in to negative territory, at -0.1%.

The figures were bad, however much of the extreme market reaction is likely due to the lop-sided positioning on most assets which are US Dollar denominated. Long positioning on the US dollar was overwhelming, and Wednesday’s figures put a damper on sentiment towards the US economy – putting many trades in to reverse.

The Euro rose two and a half cents against the US dollar after the release, while GBP, AUD and NZD all rallied between one and one and a half cents. Interest rate and bond markets remain in disbelief over the path of interest rates for the US economy, with the market now pushing back US rate rises until around the end of 2015.

There has also been some suggestion that the Federal Reserve may in fact need to continue with its asset purchase program at the end of this month; while this is currently a rumour, it would certainly not be against the Federal Reserve’s dual mandate of tending to Employment and Inflation. Inflation expectations are currently plummeting, and with the price of Brent and WTI plummeting in tandem, a strong US dollar is putting pressure on FOMC members to reconsider their expected policy tightening. This month’s volatility makes the October Fed meeting one to watch out for.

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